Payroll is a series of accounting transactions centered around making payments to employees for services rendered. In addition to calculating a basic hourly wage or salary for an employee, an employer must also disburse as gross pay any commission, bonuses, vacation pay, sick leave, or other compensation. On the other hand, the employer is responsible for withholding various debits from the employee's gross pay, including income tax, other taxes (such as social security and Medicare), health insurance, union dues, pension plan contributions, and other deductions.
After the appropriate deductions have been removed from the gross pay, the employee is paid the remaining amount, known as net pay. The net pay is typically disbursed to the employee in the form of cash, a handwritten check, a printed check, as a direct deposit into the employee's bank account, or some other form of electronic transfer. Along with the disbursement of payment, the employee may receive a pay stub detailing the gross income as well as the deductions for the current pay period. The pay stub may also include year to date totals for important items on the paycheck, such as gross pay, income tax withholding, social security withholding, Medicare withholding, deductions, and other details.
In addition to calculating and paying employees' net income, the employer is also responsible for transferring deducted amounts from employee paychecks, as well as making additional monetary contributions, to the appropriate organizational (i.e., governmental) bodies. For example, the employer must send portions of the employee's withholdings and any employer matching contributions to: (1) the Internal Revenue Service (IRS) as tax payments, (2) the insurance plan administrator for the group health care plan to which the employer is enrolled as health insurance payments, (3) any retirement plans, such as 401k plans, offered by the employer (including matching funds) as funding payments, and (4) any other entity for payment of any additional expenses.
Businesses may choose to process payroll by hand, by using accounting software, and/or by hiring a payroll service to handle the payroll needs of the company or small business. Small businesses with very few employees often perform payroll by hand, while small businesses with greater numbers of employees tend to use off-the-shelf payroll software or the assistance of a payroll service. Larger corporations tend to use payroll modules found within Human Resources Management Systems (HRMS), which may be client/server based software systems for streamlining and automating many aspects of human resources (HR) management.